The recent stunning rally of the S&P 500, with a nearly 12% climb in just five weeks, may face a potential threat. According to Goldman Sachs analyst, Scott Rubner, the trend-following funds that have been driving global stocks higher could be running out of steam. In this article, we will delve into Rubner's warning and explore the potential impact on the market.
Trend-Following Funds and the S&P 500 Rally
Trend-following funds, also known as CTAs or commodity trading advisers, have played a significant role in the recent rally of the S&P 500. These funds trade various futures contracts tied to equity indices, Treasury, currencies, and commodities. Their flow-of-funds dynamics have been a major driving force behind the surge in stock prices.
Goldman Sachs analyst, Scott Rubner, warns that the trend-following funds may be losing momentum, posing a potential risk to the S&P 500 rally. If the market experiences a pullback, these funds could quickly unload over $200 billion in exposure to global stocks.
CTAs' Exposure to Global Stocks
In November, CTAs significantly increased their exposure to global stocks at an unprecedented pace. According to Rubner, they bought $225 billion worth of stocks, resulting in a net long exposure of $92 billion. However, with such high exposure already, Goldman Sachs estimates that these funds have limited room to add another $58 billion if prices continue to climb.
Should prices start to decline, the trend-followers may reflexively dump around $200 billion in exposure, potentially intensifying the market pullback.
Impact on U.S. Markets
Similar to the global market, trend-following funds have significantly increased their exposure to U.S. markets in November. Their net exposure has swung from a net short position of approximately $50 billion to a net long position of over $40 billion.
UBS Group analysts have also been tracking CTA flows, highlighting the surge in positioning. This increase in exposure to U.S. markets could have implications for the overall market sentiment and potential future movements.
Potential Market Pullback
If the market experiences a pullback, the actions of trend-following funds could exacerbate the decline. As prices start to slip, these funds may quickly unload their exposure, which could amount to more than $200 billion.
Goldman Sachs analyst, Scott Rubner, warns that the current flow-of-funds dynamics that fueled the rally have lost momentum. Investors should be cautious and monitor the market closely for any signs of a potential pullback.